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Agricultural Marketing Companies as Sources of Smallholder Credit in Eastern and Southern Africa - English

Agricultural Marketing Companies as Sources of Smallholder Credit in Eastern and Southern Africa

Topic : Saving and Credit, Value Chain Finance

This study, undertaken by the Eastern and Southern Africa Division of IFAD, arose from their concern that access to production finance among the region’s smallholders is very limited and that the pace of formal rural finance system development will be quite slow in the short term, particularly with regard to production finance. The challenge was to identify alternative systems of finance that enhance the production and income generating capacity of the region’s smallholders.

The report documents what many had already suspected, i.e., that credit under contract farming arrangements is one of the major (indeed, often, the only major) forms of access to production finance among smallholders. Rather more unexpectedly, it concludes that these credits are not necessarily exploitative (although the case of Mozambique suggests that they may be under certain conditions), and that farmers who access them definitely derive concrete benefits. The report findings are based on studies that were carried out in Kenya, Zambia and Mozambique. These studies focused on the agricultural credit operations of marketing and processing companies, looking at their mode of operations, the terms of the credit provided and related commodity prices offered, the characteristics of the provider companies and their clientele, the credit volumes, outreach, and recovery performance, the current role of donors and NGOs, and other key aspects of their operations.

In Kenya, which has a better-developed and more diversified agricultural sector, contract farming and the related company input delivery is more widely practised than in Zambia and Mozambique. Money from agricultural marketing companies was found to be essential in Kenya for the production of many high-value and export crops. The study focuses on the tea industry in Kenya, the country’s leading export crop, with looks at the sugar and tobacco industries on the side. In all these industries, high credit disbursements were found to be standard. In Zambia, a much more limited agricultural environment, the largest company credit schemes were in the cotton sub-sector, with quite restricted interventions in other sectors; in Mozambique, company input credit is principally associated with cotton and tobacco companies operating on government-allocated concessions.

In the increasingly liberalized markets in Africa, there is very little public sector field presence left in the agricultural input or output markets or in the rural sector in general. Thus, to intensify smallholder farming and to increase household incomes, new approaches and partnerships need to be considered and tested, with such partners that have the ability to perform in the roles of the input and credit provider and the produce buyer. In many cases, this will in the future mean working with private processing and marketing companies. This calls for both IFAD and the governments to use creative approaches in programme designs, with adequate room for private sector participation in the implementation process.